"Elizabeth Richardson" <erichktn[at]worldnet.att.net> wrote
- quote -

I was studying this point further and came across an
interesting 2004 piece by popular financial planning
commentator Scott Burns (Dallas Morning News). It points out
how distributions from a 401(k) or Traditional IRA can
trigger the taxation of social security benefits and
potentially thrust one into an alarmingly high tax bracket.
The solution? Put more money into a Roth IRA or a taxable
account.

http://www.dallasnews.com/sharedcont...urns.ee63.html

Googling for {"social security" income "higher tax" Roth}
turns up more sites that make the same point.

MATTY wrote:
- quote -

I don't know about you, but I hope to have a lot more than 32k each year
in retirement. I will not likely take only minimum distributions. I
don't know how many people will be in the same boat as me, but I suspect
a lot.

I've created a withdrawal model for myself, estimating how much of my
retirement income will be taxable. If the tax bracket boundaries are
the same as today (i.e. in today's dollars), I'll be in the same bracket
in retirement as now. As a guess, I assume that my tax rates will be a
little higher in retirement than they are now. Both assumptions could
be wrong. But I've made my best guess, and I plan as if that guess is
correct. For me, that means Roth conversions. Ask me again in a couple
of decades and I'll let you know how everything turns out...

-Will

Mark Bole wrote:

- quote -

I don't think this case crosses a bracket boundary for single filers.
In any case, you snipped the part where I said, "Assuming that the
conversion does not put the OP into a higher tax bracket..." However,
you have a good point about phase-outs, etc. I don't think that a
conversion makes getting caught in the AMT more likely, though.

-Will

- quote -

The link posted also had a good article on explaining some of the AMT
triggers. Thank you again.

Will Trice wrote:

- quote -

Because if he converted all at once, he would go from $70K to $110K
annual income (57% increase). I haven't run the numbers, but for a
single filer, I can easily believe that would lead not only to a higher
bracket, but various phase-outs and limitations as well as possibly AMT
would probably kick in. The OP never told us anything about his tax
filing status, however.

- quote -

OK, let me rephrase: "the plus side is, with an IRA conversion you have
the ability, albeit limited, to 'do it over' if it is to your benefit at
a later time".

As far as another downside, I agree with Elle from later in the thread
that the tax and paperwork involved in multiple re-conversions is not
trivial. It's not unheard of for a custodian to issue an incorrect
1099-R (wrong distribution code, etc) -- and that's a major
stress-inducing nightmare that goes on for years thanks to the IRS time
lag in reviewing returns. Your experience may have been good, but
there's a lot for a trustee to screw up if you are converting and
reconverting back and forth over a multiple year period.

-Mark Bole

"MATTY" <mathjak107[at]aol.com> wrote in message
news:1157707927.451380.49640[at]i42g2000cwa.googlegroups.com...
- quote -

I agree with you, Matty, that future tax brackets are probably not a good
enough reason to convert to a Roth. For one thing, it is likely folly to
think that tax brackets will be the same when you're 65 as when you're 40.
We did convert all of my husband's IRA and more than 50% of mine on the
basis that we wouldn't have to take RMD at 70 with the Roth. I think the
argument for conversion is whether you want to pay taxes on a distribution
that may not be needed.

Elizabeth Richardson

MATTY wrote:

- quote -


I don't know what percent of people the conversion favors, and have
little interest in researching that specific info. I do know it's worth
discussing as it can have a huge impact for those who do benefit.
Here are two examples from my personal experience;

80 year old woman, taxable income (I just did a projection for her) for
2006 - $27K. This includes an RMD (Required minimum distribution) from
her IRA of $7950. Given how quickly the RMD rises - remember, her
accounts are still growing, and the RMD divisor, dropping - it would
rise past $11K by the time she's 84, and $15K by 90. By converting
$4,000 this year, and just enough to stay in the 15% bracket, I project
that by 90 we can have as much as $90K converted at 15%. Since the next
rate is 25%, it's worth the effort. As an important side note, her two
adult children are both 28% earners. When she goes to the Divine
Treasury and leaves the IRA to the kids, their withdrawals from the Roth
will not be taxed. And while she lives, if she has an urgent need for
extra money, the Roth is her secondary emergency fund.

48 year old woman, on disability, worker's comp. Living on the
disability payments and post tax savings. We convert enough IRA to Roth
to keep her in the zero bracket, i.e. just the STD deduction/Exemption
numbers, in 2006, $8450. By the time she's burned her post tax money,
she'll be 70 or older, and her RMD will likely stay in the zero bracket.
Her surviving cat will not have any tax to pay on the Roth withdrawal,
and the IRA is set to go to a charity.

These are two very different circumstances, of course. Illustrating that
the conversion has specific times that it's called for. In both cases
the savings are not insignificant. I'll close by saying that if the
delta for the first case was just a jump from 25% to 28%, I might not be
as enthusiastic about the conversion. The 10% delta (from 15 to 25) got
my attention. The second woman also saves 10%, money she can ill afford
to waste.

JOE

For most of us im not convinced the conversion is worth it unless you
think you will be in a higher bracket when retired.Not many americans
will have a higher tax bracket with no pay check than they do with
one.At retirement age you can almost take 32,000 every year from ira or
401k money and pay no more than 1500.00 bucks tax on it.With the income
tax brackets being extended each year by about 3,000 bucks in the very
next few years the 15% bracket may be around 75,000.Unless your
min.distrubutions will raise you sooooo high in tax bracket i wouldnt
lop off a huge chunk of my working dough and pay any taxes now i can
delay to later.I dont see it in the cards that any political group or
leader would ever tell the 80 million baby boomers they are increasing
their taxes in the future.Just my opinion!

Elle wrote:
- quote -

Yep, thanks for the clarification.

- quote -

Really? When I've done the paperwork (three years in a row, )&*^%^%34
bear market), I thought the paperwork to be fairly straight forward,
though I understand your point about the calculations being vague. I
just used something that was reasonable, I figure that will survive an
audit.

-Will

"jIM" <noreplysoccer[at]hotmail.com> writes:

- quote -

State income taxes and state and local real estate taxes, personal
property taxes, and intangibles taxes are not deductible under the
AMT.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"jIM" <noreplysoccer[at]hotmail.com> writes:

- quote -

You're reading the table wrong.

First $15,000 of taxable income is taxed at 10%,
Taxable income from $15,100 to $61,300 is taxed at 15%
Taxable income from $61,300 to $123,700 is taxed at 25%
Taxable income from $123,700 to $188,450 is taxed at 28%.

- quote -

Just read across to make the whole sentence. For example if your
taxable income is between $61,300 and $123,700, the tax is $8,440
plus 25% of the amount of taxable income over $61,300. So if
your taxable income is $90,000, your tax is:
$8,440 + 0.25($90,000 - $61,300)
= $15,615

And keep in mind those tables are with respect to taxable
income (adjusted gross income minus allowable deductions
and personal exemptions).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"Mark Bole" <makbo[at]pacbell.net> wrote
- quote -

Clarification: You mean do the first conversion in year X,
then recharacterize as needed before the due date of one's
tax return for year X, then convert again for tax year
(X+1), right?

- quote -

Also, before newbies forge ahead thinking conversions and
recharacterizations may still be done fairly willy-nilly, a
caveat: The tax paperwork involved in a recharacterization
can be gosh-awful. This is typically due to a change in
stock etc. value between when the conversion was done and
when the recharacterization is done. As of a few years ago,
the proper IRS-approved method to use to compute the net
conversion was still vague. Examples abound on the net; the
general idea behind them makes sense; and it's not like
we're necessarily talking about huge errors either way. But
the ambiguity of how the calculations were to be done left
me a bit uncomfortable, at least as of a few years ago when
I last did a recharacterization.

- quote -


good web site, thank you. My interpretation of this is if:

married filing jointly

first 15,100 of income is not taxed
income between 15,100 and 61,300 is taxed at a rate of 15%
income between 61,000 and 123,700 is taxed at 25%
income between 123,700 and 188,450 is taxed at 28%

I am unsure of what column "the tax is" means- I think this is the tax
paid on money in previous bracket, because taxation is graduated.

so for purpose of converting to Roth, convert to income hitting
$123,700. If income was already at that level, convert an amount which
income stays below $188,450 (or wait to convert in a year where person
converting earns less).

jIM wrote:

- quote -

sorry I though I posted this
http://www.fairmark.com/refrence/index.htm

google: 2006 tax rates fairmark

and this was the first hit. limited info, but exactly what we needed for
this exercise. good luck.
JOE

- quote -

where is the cutoff between 28% tax bracket and next one higher? Is
their a web site someone can refer me to for the tax tables?

Rich Carreiro wrote:


- quote -

I look to see if AMT was being used within Turbotax?


- quote -

The state income tax comment got me thinking... what about state income
tax being "taken out" triggers AMT- too much or too little? We did owe
state quite a bit of money last year (too little taken out).

Mark Bole wrote:
- quote -

Why not?

- quote -

If you can reconvert later, why is this a problem?

-Will

Will Trice wrote:
- quote -

Yes, although there are some limits on how frequently you can
re-convert. IIRC your assumption does not apply to the OP, however.

Just as you want to buy stock on the day it is priced the lowest, you
want to convert your Traditional to Roth on the day your existing
balance is lowest, all other things being equal. I was simply (perhaps
naively?) trying to apply the general rule of cost-averaging over time
to both problems. I suppose the difference is, with an IRA conversion
you have a limited ability to "do it over" if it is to your benefit at a
later time.

-Mark Bole

Mark Bole wrote:
- quote -

Assuming that the conversion does not put the OP into a higher tax
bracket, wouldn't it be best to convert everything (or at least up to
the next tax bracket) at once, and just recharacterize and reconvert the
next year if the value of the account declines?

-Will

wangchieh[at]wongfaye.com wrote:
- quote -

Not all at once. Adding $40K income (from the traditional IRA, assuming
you have no basis in it) in a single year will require you to make some
hefty estimated tax payments and will be taxed at maximum rates
(although you told us nothing about your filing status, state of
residence, adjustments and deductions, etc).

Also, assuming your traditional IRA is in stocks and bonds, what if the
day you make the conversion happens to be the high point of the market
for the year? That's the amount you'll be taxed on, even if the Roth
drops in value by the end of the year.

A better strategy is to convert maybe $10K/year, quarterly or
semi-annually, over the next four years, to get the benefits of
dollar-cost-averaging. Also, if the tax law doesn't change, there will
be a one-time opportunity in 2009 or thereabouts to spread the income
from a conversion to Roth over two tax years.

At your age, the tax-free earnings from the Roth over the next 20-30
years should be a good deal, so it's more a matter of how, not if.

-Mark Bole